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To: Members of the Board From: Office of the Secretary Attached is a copy of the minutes of the meeting of the Board of Governors of the Federal Reserve System with the Presidents Of the Federal Reserve Banks held on July 280 1959. It is not proposed to include a statement with respect to any of the entries in this set of minutes in.the record of policy actions required to be maintained pursuant to section 10 of the Federal Reserve Act. Should you have any question with regard to the minutes, it be appreciated if you will advise the Secretary's Office. Othervise, if you were present at the meeting, please initial in column A below to indicate that you approve the minutes. If you were not Present, please initial in column B below to indicate that you have seen the minutes. Chm. Martin Gov. Szymczak Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson Gov. King A meeting of the Board of Governors of the Federal Reserve SYstem with the Presidents of the Federal Reserve Banks was held in the Board Room of the Federal Reserve Building in Washington, D. C•1 Tuesday, July 28, 1959, at 11:35 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Martin, Chairman Balderston, Vice Chairman Mills Robertson Shepardson Mr. Sherman, Secretary Mr. Kenyon, Assistant Secretary Messrs. Erickson, Hayes, Bopp, Leach, Allen, Johns, Deming, Leedy, Irons, and Mangels, Presidents of the Federal Reserve Banks of Boston, New York, Philadelphia, Richmond, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco, respectively Mr. Rouse, Vice President, Federal Reserve Bank of New York There was an informal discussion of developments with respect to Congressional consideration of Administration proposals to increase the interest rate ceilings on Treasury bonds and United States savings 111°Ilde, at the conclusion of which Chairman Martin indicated that he would Ileicome whatever further views the individual Presidents might care to elcIpress on this subject from time to time, particularly in regard to the Proposed amendment to the legislation which would state the sense or the Congress with regard to the formulation of monetary policy. It was understood that there would be sent to the Presidents c/14.es of the testimony given yesterday by Chairman Martin before the 4614t Economic Committee and also of the press releases issued recently 7/28/59 -2- by Republican members of the House Ways and Means Committee and by the Speaker of the House with respect to the Administration proposals and the "sense of the Congress" amendment. Mr. Rouse then withdrew and Mr. Dunne, Secretary of the Conference Of Presidents of the Federal Reserve Banks, entered the room, along with the following members of the Board's staff: Mr. Harris, Coordinator of Defense Planning; Mr. Farrell, Director, Division of Bank Operations; Mr. Allison, Special Consultant to the Board; and Mr. Solomon, Assistant General Counsel. The Presidents had been asked to meet with the Board for consideration of questions that had arisen in connection with possible expenditures by Reserve Banks to improve vault facilities at cash agent banks selected for the storage of supplies of currency as a Part of the emergency planning program. In a letter dated July 13) 1959) President Fulton of the Federal Reserve Bank of Cleveland had advised the Board that the Cleveland Bank was prepared to enter into lease agreements with its selected cash agent banks and that certain -.4-, nditures would be necessary to improve such facilities. It was indicated that in most instances the proposed expenditures would be Of a minor nature, but that in a few cases items such as vault doors and door frames were involved. In the latter instances the Cleveland Ilank proposed to obtain rent-free space for 10 years so that improvement 7/28/59 -3- exPenditures made by the Bank would be amortized over such period in lieu of the payment of rent. Mr. Fulton inquired whether the Board had taken any position with respect to such expenditures or whether it liould be left to the individual Reserve Banks to determine what was reasonable and appropriate. In a statement introducing discussion of the matter, Governor Robertson referred to the use of cash agent banks as one of the important elements of the emergency plans of the Federal Reserve Banks. The selection of cash agent banks had reached the point where it was now becoming necessary to enter into contractual relationships and, although 8°Ille of the available vault facilities would be found generally adequate, Others would have to be altered. Thus, the problem at the Cleveland Reserve Bank had come before the Board for consideration. One alterna- tive would be to follow a procedure whereby the Reserve Bank would pay the cost of items such as vault doors and take such cost into consideration 14 determining the rental to be paid under the lease agreement with the 'eh agent bpink, while another alternative would be for the cash agent " bellk to pay such expenses as might be necessary to put its facilities 14t° fteceptable condition, with those expenditures again taken into c°4sideration in determining the amount of rental over a period of tittle* 411 It might be that the Reserve Bank concerned, in the light of the circumstances, would have to determine which of these methods 7/28/59 -4- should be followed in order to move forward expeditiously. In any event, he felt that it would not be practicable to delay placing the facilities of cash agent banks in adequate condition until postattack even in the event of a determination that currency would not actually be stored at such pointipreattack. The necessary steps to place the selected vault facilities in Proper condition should be made quickly, Governor Robertson said, but he felt that in advance of any actual prepositioning of cash the arrangements should be cleared with some designated person, for example, Mr. Harris, so the System would always be able to describe and defend the 4zrangements to such extent as might be necessary. It seemed inappro- Priate for the Board to respond to any individual Reserve Bank regarding questions such as raised by Mr. Fulton without clearing the matter with 411 of the Presidents, and accordingly the Board asked to meet with the Presidents to obtain their views. Summarizing, Governor Robertson stated that the questions were (1) how best to proceed to put the vault facilities of cash agent banks Illto such condition as actuplly to be usable, (2) whether the necessary 1171Provement expenditures should be made by the Federal Reserve Bank, by the agent bank, or in some combination, (3) how such expenditures should be taken into account in the rental agreement, (4) the nature of the e•greement, and (5) whether such agreements should be uniform throughout the System. -5- 7/28/59 Chairman Johns inquired whether this might be a problem unique in the Cleveland District, to which Governor Robertson replied in terms that this was the first case to come to the Board's attention but there seemed likely to be instances in other Reserve districts where work Would have to be done in order to place the facilities of cash agent banks in acceptable condition. In some districts it might be possible, of course, to locate cash agent banks with adequate facilities in the desired areas. President Hayes, who, as Chairman of the Special Committee on Emergency Planning, had received from President Fulton a letter similar to the one Mr. Fulton sent to the Board, said that the New York Bank had not been faced with the question of making expenditures such as contemplated by the Cleveland Bank. The New York Bank was one of those nct planning to store currency preattack, and it did not feel that eine rgency vault facilities would be needed postattack because the cash agent banks, in the event of an attack, would have only nominal amounts Of currency. Reserve In general, however, it seemed to him that each //114k was entitled to make whatever expenditures were deemed necessary including those connection with its emergency planning program, involved in making arrangements with cash agent banks. He was not inclined to think that any System policy was needed with regard to e)cDenditures of this type. These views, Mr. Hayes said, were set forth in e letter that he wrote to President Allen, who had previously written to ' 7/28/59 -6- Mr. Fulton expressing the view that the program envisaged by the Cleveland Bank seemed quite proper and reasonable. Mr. Allen, however, encouraged Mr. Fulton to submit the Cleveland plan to the Board for its information, adding that he did not see what kind of System policy could be developed Other than that any expenditures should be those considered reasonable ilia the judgment of the particular Reserve Bank, including any expenses that might need to be incurred for vault alterations. After some of the Reserve Bank Presidents had indicated that their plans did not contemplate going further than to make minor expenditures on vault facilities at cash agent banks, Chairman Martin inquired Of Mr. Hayes whether he was correct in his understanding that the latter thought no System policy was needed. Mr. Hayes replied that Chairman Martin's understanding was correct. He went on to say that there was a difference of opinion among the Presidents as to whether currency Should be stored at cash agent banks preattack, as indicated by the MIhutes of the June meeting of the Conference of Presidents. Chairman Martin then turned to Mr. Harris, who commented that it vas implicit in the emergency plans of the Federal Reserve Banks that theY have cash agent banks, selected on the basis of strategic location, "that money could be made available in the event of an attack that tIlllited in the normal sources of currency being cut off. It would be 481 fted that, if possible, the Reserve Banks would select cash agent - having adequate existing facilities but in covering strategic 7/28/59 -7 areas a Reserve Bank might have to select a cash agent whose facilities must be improved in order to afford adequate protection to the currency either preattack or postattack. It would be his opinion that after a Reserve Bank had made its survey and selected cash agents on the basis deemed most appropriate from the standpoint of strategic locations, the Reserve Bank should be given a green light to do whatever vas necessary Preattack to make the vault facilities secure. While matters of judgment vere involved, it was generally recognized that a cash agent was performing a function for the Reserve Bank rather than for itself and should be saved harmless. If, in making vault facility improvements, lasting benefits should inure to a cash agent bank, this should be taken into consideration in determining the amount of rental paid for the vault facilities in one manner or another, depending upon whether the Reserve 11:ank or the cash agent bank made the improvement expenditures initially. With further reference to the question of the need for a System Pc/licY, Governor Robertson brought out that he was interested only in inauring that no Reserve Bank would refrain from proceeding to obtain the use of adequate facilities at cash agent banks simply because the Board had not taken a position. It might be that the only thing neces- earl' , vas an understanding around the table, or it might be that a letter tlicm the Board to the Reserve Banks would be appropriate. President Hayes again expressed the view that there was no need complete uniformity of procedure in the respective districts, it being his thought that considerations vere likely to be different from °Ile district to another. 7/28/59 -8In further discussion Governor Mills referred to the possibility, in connection with the selection of cash agent banks, of a charge being made that one community had been preferred over another or one bank over another. If, beyond that, the Reserve Bank installed improvements to vault facilities in such a manner as to give the impression of a subsidy to a cash agent bank, that might present an opportunity to those inclined to criticize Reserve Bank expenditures. Governor Mills felt that the qYstem should guard against such a contingency and that the lease agreeIsents should specify clearly that the amount of rental reflected consideration of any expenditures made for the benefit of the cash agent ballk• It might be desirable to have an exchange of views among the Reserve Banks as to the general type of language to be used in the lease agreements to accomplish the purpose of taking properly into account expenditures by a Reserve Bank to improve the facilities of a caah agent bank. Chairman Johns said he hoped that he would not have to defend 4115r such expenditures. In his opinion, considerations of strategic 1"ation were not so open and shut that a Reserve Bank need find itself 14' the position of being compelled to install items such as vault doors, it should be possible to find an alternative site where existing 11144 facilities would be adequate. In making this comment, he was not l'efell'ing to minor expenditures such as placing compartments within the alat. 7/28/59 Chairman Martin then inquired how the matter should be left and stated that it seemed important that no Reserve Bank refrain from going forward with its program in view of the System's responsibilities under the over-all defense planning program. Question was raised as to whether it would be advisable to refer the matter back to the Cleveland Bank 'with a request for alternatives, and Governor Robertson commented to the effect that if any Reserve Bank had come to the conclusion, after looking over its district, that cash agent banks were needed in certain locations and it then developed that improvements at the selected banks were required, he doubted whether it vould do any good to go back to the Reserve Bank and request alternatives, for presumably the matter had been studied th°roughly by the Bank. There ensued comments on the extent of the expenditures envisaged Under the Cleveland program, after 'which Governor Robertson referred t° the comment that had been made to the effect that a System policy not needed and that questions of expenditures should be left to the ul scretion of each Reserve Bank. Subsequent comments, he noted, A. seem—. -cm, to suggest that the Board develop a policy with respect to plans 1111114141Aed by individual Reserve Banks, and there appeared to be a lack or harmonY between the two lines of approach. Mr. Hayes responded that a matter of judgment was involved, t e Board might wish to refer back to a Reserve Bank any program 7/28/59 -10- that seemed highly extravagant, but that a considerable amount of leeway might be left for the exercise of discretion. Governor Robertson indicated that he would be satisfied if there was a clear understanding that no Reserve Bank would hesitate to make an expenditure which seemed to it reasonable and essential. Re questioned whether the Board was in a position to make a distinction and determine that the judgment of a particular Reserve Bank was erroneous. In comments that followed, reference was made to the possibility an arrangement under which an item such as a vault door installed at a cash agent bank would remain the property of the Reserve Bank, the P°88ibility of seeking alternative locations when banks with adequate tacilities could not be found at the locations originally chosen, and the Possibility that expenditures would be made at a cash agent bank 114 an area thereafter designated as a target area. The discussion then turned to the need for use of cash agent ballka for storage of currency preattack, and President Ieedy set forth re 'why storage preattack had not been deemed necessary in the ellth District in view of the locations of the Reserve Bank branches. ?esidelat Hayes again brought out that the Presidentst Conference had telt that this was a matter which could be left to the judgment of each Reserve Bank. 7/28/59 -11In this connection Governor Robertson said it was his view that a program envisaging use of cash agent banks postattack only 'would be of almost no value. While there might be situations 'where there "ere enough branches, appropriately located, in a Reserve district to lessen the need for cash agent banks, it vas his present thought to recommend to the Board that cash be prepositioned. This was a question oa which, in his opinion, the Board must act sooner or later. Chairman Martin then inquired whether the question of expenditures for the improvement of facilities, where necessary at cash agent banks, was not one that could be left generally to the judgment of the individual Reserve Banks, and Governor Robertson said he felt the matter should be left on that basis. President Allen noted that Reserve Banks would come to the Board for permission to disperse cash to the agent banks and said it vould be the suggestion of the Special °mmittee on Emergency Planning that any Reserve Bank envisaging major exPenditures bring the matter to the attention of the Board. The meeting then adjourned. , Secre ry
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